Understanding Collateral Loans

How to Obtain Secured Loans With Your Collateral

Are you interested in taking out a collateral loan? In this knowledge article the collateral loan specialists at Diamond Estate Jewelry Buyers will guide you through the various options available for obtaining a secured loan with your collateral.

A collateral loan is a loan that is secured by some asset you own. If you cannot repay the loan, you promise to surrender the asset to the lender. By using a collateral loan, the lender takes less risk than with an unsecured loan, and it is generally easier for the borrower to obtain the loan at a reasonable interest rate.

New Home & Car Purchases Are Collateral Loans

The most common types of collateral loans are auto and home loans. In these cases, the collateral is actually the asset you are financing. Banks will lend you money to buy the car or home, with the promise that if you cannot repay, you will surrender the asset. If you fall behind on your home mortgage, the bank forecloses and takes ownership of the property, or in the case of cars, they repossess them. The bank can then sell the asset to recover their money. This type of guarantee secures the loan for the bank in the event that the borrower cannot repay.

Using Your House For A Collateral Loan

Many other assets can be used to secure a collateral loan. If you already own your home outright, you can use it as a pledged asset to secure a loan for things like home improvements, debt consolidation, or starting a business. And even if you still have a mortgage, your real estate may still be used as collateral.

If your house has increased in value since you began making mortgage payments, you have established equity, or the difference between what you owe and the current market value of the house. Equity is the amount an owner would receive after selling a property and paying off the mortgage, and it is an asset often used as collateral.

Using Cash Accounts For Collateral Loans

When you take out a cash-secured loan, you are using your own savings as collateral. Since you will have to pay interest on the loan, it may seem counter intuitive: Why would I pay interest if I already have the cash? These types of collateral loans are often used to boost credit ratings, and are normally tied to certificates of deposit or savings accounts.

You have to get the loan from the same bank that holds your CD or savings account so that the bank can place a freeze on that account. While the freeze prohibits you from accessing the funds in your account until the loan is paid off, you will still accrue interest on the account. And because there is no real risk for the bank, these types of secure loans are often priced below the prime rate (the interest rate that large banks charge on short-term loans to their best customers).

Banks don’t usually check your credit score before issuing cash secured loans, but they do report cash-secured loan payments to the credit bureaus, making these types of loans a great tool for rebuilding credit. You can get the money you need without having to wipe out your bank account.

Because banks don’t make a lot of money on cash secured loans, loan terms are usually limited to five to ten years. This means that the payments will be higher than on a long-term loan, and some banks will not let you pay off the loan with the cash you used to secure it. And even if they do, you may have to pay a penalty for cashing in your CD before the term ends.

Using Investments and Securities For Collateral Loans

You can also use investments and securities as collateral for a loan, so you can get the money you need today without disrupting your portfolio. As long as your investment account has sufficient eligible securities to use as collateral, this type of loan may be easier to obtain and be offered at a lower interest rate. These loans often feature no set up or cancellation fees, and can give you the ability to borrow between 50% and 90% of your eligible assets’ value.

Securities-based borrowing has special risks. If the market value of your investment portfolio drops below required levels, you may be forced to pay down your debt, offer additional securities for collateral, or even sell some of the pledged assets. The sale of these pledged assets may also have adverse tax consequences, so careful consideration of all the consequences should be made before taking out this type of secured loan.

Using Future Payments For Collateral Loans

Another asset you can use as collateral is future payments. Anything that can be seen as potential future earnings can be used. These can be in the form of accounts receivable or purchase orders in the case of a business. As the borrower, a purchase order issued to you represents future sales on your part and can secure the loan. Another source of future payments could be loans or promissory notes you have made to other people.

Using Life Insurance Policies For Collateral Loans

Life insurance policies can be used as collateral by assigning the death benefit to the lender. A simple contract is drawn up, naming the lender as the primary beneficiary in the event that the owner of the policy dies before final repayment is made on the loan.

The contract is between the policy owner and the lender. The insurance company remains a disinterested party in the assignment arrangements, except for its obligation to execute the terms of the contract. If the policy’s death benefit is greater than the dollar amount of the collateral assignment, remaining proceeds are distributed to the original beneficiaries.

Using Valuables & Collectibles For Collateral Loans

Fine jewelry and valuable collectible items also can be used as collateral for a no-credit-check loan. Banks won’t secure a loan of this type, but pawn shops are based on this model exclusively. While pawn shops have improved their reputations in recent years (thanks to TV shows like Pawn Stars), many people with high-brand diamond jewelry and watches remain resistant to the idea of approaching their local pawn shop for a personal loan.

Let’s examine this area of secured loans more closely to evaluate your options. If you are looking to obtain a large collateral loan for an item such as a large carat Tiffany diamond ring or a vintage Rolex watch, the two biggest areas of concern are likely the pawnbroker’s location and expertise in luxury assets.

In many cities, pawn shops are located in old commercial areas that are showing signs of neglect, and are filled with a mixed bag of un-redeemed collateral ranging from fishing poles to $50 bicycles to tool sets, firearms, and lawnmowers. While these same shops may have a substantial amount of gold jewelry and diamonds displayed in their showcases, this tends to be mass market jewelry which has been pawned strictly for the recycle value of the gold or diamond.

In recent years, some pawn shops have improved their image, focusing on better customer service and a newer, cleaner appearance. This has resulted in the evolution of a more professional looking breed of pawn shop. These pawn shops may be located in a better part of town, with a staff that is more appropriately attired and oriented toward friendly customer service. However, as long as these pawn shops are still dealing in tool sets, firearms, televisions, laptops, and other miscellaneous items, it is difficult for them to serve clients who are looking to pawn an expensive diamond or luxury watch—as appraising the full value of these items requires a high-level of expertise.

However, there are businesses (such as Diamond Estate Jewelry Buyers), who offer discreet personal loan services and specialize in large collateral loans on fine jewelry and Swiss timepieces. At a typical pawn shop, your luxury item is assessed by the owner or the owner’s staff. If they are interested in the item, they will offer you a collateral loan. The size of this loan and how it is calculated is a key difference between a typical pawn shop and a luxury collateral lender like Diamond Estate Jewelry Buyers.

The typical pawn shop is both a collateral lender, and a retail store. For that reason, they are looking at your item as a potential inventory item. As such, they will want to offer you roughly half of its wholesale value, or about one fourth of what they can re-sell it for in their store. A high-end collateral lender like Diamond Estate Jewelry Buyers, however, will offer closer to the full wholesale value of your item.

The pawn shop’s collateral loan is much lower because of its business model, which is designed to make money two ways: 1) on the interest you pay on your collateral loan, and 2) on the profit margin they’ve built in should you fail to redeem your loan and forfeit your item. A luxury lender like Diamond Estate Jewelry Buyers offers collateral loans closer to the full wholesale value of your item, because its business model is based on earning money solely from the interest you pay on your loan, rather than the sale of your item should you fail to redeem your loan.

You therefore can expect to obtain a much larger cash loan (often up to 100% larger) with the same item of luxury collateral if you pawn it with Diamond Estate Jewelry Buyers, as opposed to a typical pawn shop.

Then there is the issue of expertise. If the person evaluating your luxury item is trained to evaluate all different kinds of collateral ranging from tool sets and handguns to computers and fishing poles, there is a good chance that when it comes to appraising your large diamond or Rolex watch, they will want to “err on the side of caution.” That means if they are not 100% sure of your item’s true current market value, they will offer you less money to remain on the safe side of the equation.

Their reduced cash loan offer is then made even lower when the pawn shop reduces the offer again by following the general “loan half of wholesale value” rule typical of most pawn shops. This is why so many consumers say things like “ridiculously low offer”, or “pennies on the dollar,” to describe some pawn shop experiences they’ve had in the past.

However, a luxury lender such as Diamond Estate Jewelry Buyers employs a staff whose expertise is strictly focused in the area of fine jewelry, diamonds, and watches. So, they know exactly how much your luxury item is worth, and will sometimes loan you as much as 100% of its wholesale value.

“The reason for this is two-fold,” says Carl Blackburn, owner of Diamond Estate Jewelry Buyers, “One, when we know exactly what an item is worth on the current market, we can be very precise and correct on our offer; and two, since our business model does not depend on making a profit on the sale of your item should you fail to redeem it, we can loan the full wholesale value of it.”

“In a sense, we offer the best of both worlds as both brokers and lenders,” says Blackburn. “When we act as brokers we buy your item directly and pay you the highest amount of cash for it. When we act as lenders, we provide you with the most professional, courteous, and safe environment in which to obtain a large collateral loan at interest rates much lower than those levied by typical bricks-and-mortar and online pawn shops.”

Contact Diamond Estate Jewelry Buyers now to take advantage of their free expert evaluation and obtain the highest cash loan for your portable luxury asset.

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The DEJB Knowledge Corner

Read our original knowledge articles to learn how to buy & sell estate jewelry and luxury watches, as well as how to obtain alternative financing for businesses startups, retirement planning, buying a new home, adult education, and more:

What We Buy

However, we specialize in important jewels, signed estate jewelry, high-grade colored gems, and large carat diamonds. Some of the more important names that we look for in contemporary and antique jewelry & timepieces are listed below.